Going concern problems

Posted on 28 Feb 2018
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The Financial Reporting Council’s (FRC) chief executive Stephen Haddrill has admitted that it was ‘frankly struggling’ with attempts to include going concern in the international accounting framework, with no progress in winning any support for the concept from the International Accounting Standards Board (IASB) report Harris & Co accountants Northampton #accountantsnorthampton

The candid statement was made before the House of Lords economics committee during which the regulator robustly defended proposed changes to going concern requirements, saying it has now defined a ‘middle way’ which is broadly acceptable to investors and companies, although they conceded that attempts to gain international backing have largely failed.

Haddrill conceded that the FRC’s attempts to introduce the changes suggested by the Sharman review which examined corporate governance failures during the crisis had proved controversial, with the regulator required to go out to consultation three times.

He went further, saying:

‘The IASB hasn’t decided to go down [the going concern] route. We have to decide as to whether the UK does something quite ground-breaking that no-one else has done. The board is minded to do that. In future that would point to the UK as best practice.’

He reported good progress in two of the three key areas, that is achieving greater clarity about what the going concern statement means and linking material uncertainties and risks more closely to going concern reporting.

In his first appearance in front of the committee as FRC chairman, Sir Win Bischoff said that many investors had previously misunderstand what the going concern statement in the accounts meant, a problem which had been highlighted during the financial crisis.

Bischoff said:

‘We think it should clearly indicate the longer term viability of the company and be more forward-looking. We are not laying down a specific timeframe – we will leave that up to the boards. But we want companies to give a more prospective view of where the business is going, taking into account the risks and uncertainties it has identified over the period it defines.’

Stephen Haddrill, FRC chief executive, said:

‘There is value in opening the curtain a bit on the planning and [on what is] discussed in the boardroom.’

However, Bischoff did not support a proposal put forward by Lord Lawson, a former Chancellor, that banks should produce two sets of accounts, one according to IFRS rules and the other according to the requirements set by regulators, saying this would be an issue for the Prudential Regulation Authority (PRA) to consider.

Haddrill said:

‘It is important we end up with as much comparability for investors as possible, which would not happen if we create an entirely new set of regulatory accounts.’

The FRC team also cast doubt on suggestions from Lord Lawson that banks’ accounts should be subject to a ratings system similar to that used by credit agencies as a way of indicating areas of concern, saying that a bad rating would effectively cause a crisis.

In response, Haddrill said bank audits had been made a priority for regulatory inspections this year. He welcomed the Competition Commission’s (now the Competition and Markets Authority) recommendation that the FRC’s audit inspection reports be published by the company concerned, saying this would encourage auditors to ensure standards were high. The FRC is to launch a consultation on this proposal in the next couple of months.

The FRC executives agreed with the economic committee that while the going concern and other Sharman proposals aimed to create more long-term stability for companies, the tax system currently favoured the opposite approach by offering tax advantages for loan finance rather than equity. Bischoff said this point was currently under review, although no formal recommendation had been made so far.

Haddrill concluded the hour-long session by informing the committee that responses to the latest consultation on going concern and other corporate governance issues, which closed at the end of June, will be considered over the next two months. An announcement on the recommendations is expected in mid-September.

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